NOVEMBER 2025
www.newgenstrategies.net
WATER COST OF
SERVICE AND RATE
STUDY
FINAL REPORT
Prepared for:
City of Vernon Public Utilities
© 2025 NEWGEN STRATEGIES AND SOLUTIONS, LLC
Economics | Strategy | Stakeholders | Sustainability VPU Water Cost of Service Study Report Table of Contents
Executive Summary
Section 1 Background and Scope of Work .......................................................................1-1 City of Vernon Water Utility ..........................................................................................1-1 Scope of Work ...............................................................................................................1-1 Study Approach .............................................................................................................1-2 Data Relied Upon...........................................................................................................1-3 Section 2 Revenue Requirements...................................................................................2-1 Operating and Maintenance (O&M) Costs....................................................................2-1 Existing Debt Service .....................................................................................................2-1 Planned Capital Improvements.....................................................................................2-2 Miscellaneous Non-Rate Revenues...............................................................................2-3 Net Revenue Requirement Forecast .............................................................................2-3 Section 3 Cost of Service ................................................................................................3-1 California Constitution – Article XIII D, Section 6 (Proposition 218) .............................3-1 Cost of Service Analysis.................................................................................................3-2 Section 4 Financial Forecast and Recommended Rates....................................................4-1 Reserve Policy Recommendations ................................................................................4-1 Recommended Reserves Forecast......................................................................4-1 Currently Effective Rates...............................................................................................4-2 Customers and Demand................................................................................................4-3 Recommended Rates.....................................................................................................4-5 Water Cost Adjustment.......................................................................................4-5 Financial Forecast Under Recommended Rates............................................................4-5 Customer Bill Impacts....................................................................................................4-6 Regional Bill Comparisons.............................................................................................4-7 Table of Contents
ii VPU Water Cost of Service Study Report
List of Tables
Table 2-1 Operating and Maintenance Costs Forecast (Thousands).......................................2-1 Table 2-2 Existing Debt Service Forecast (Thousands) ............................................................2-2 Table 2-3 Capital Improvement Funding Plan Summary (Thousands) ....................................2-2 Table 2-4 Miscellaneous Non-Rate Revenues (Thousands).....................................................2-3 Table 2-5 Net Revenue Requirement Forecast (Thousands)...................................................2-4 Table 3-1 Assignment of Total Revenue Requirement to Services (Thousands).....................3-3 Table 4-1 Recommended Reserve Minimums and Targets (Thousands) ................................4-2 Table 4-2 Fiscal Year 2025 Effective Rates...............................................................................4-3 Table 4-3 Customers and Demand...........................................................................................4-4 Table 4-4 Recommended Rates – Effective January 1 Each Year ............................................4-5 Table 4-5 Customer Bill Impacts – Recommended Rates........................................................4-6 Table A-1 Capital Improvement Plan Detail............................................................................ A-1 List of Figures
Figure 1-1: Rate Study Process.................................................................................................1-2 Figure 4-1. Five-Year Water Fund Balance Forecast Under Recommended Rates..................4-6 Figure 4-2. Regional Residential Bill Comparison ....................................................................4-7 Figure 4-3. Regional Commercial Bill Comparison...................................................................4-8 Figure 4-4. Regional Industrial Bill Comparison.......................................................................4-9 List of Appendices
A Five-Year Capital Improvement Plan Detail
© 2025 NEWGEN STRATEGIES AND SOLUTIONS, LLC
Economics | Strategy | Stakeholders | Sustainability VPU Water Cost of Service Study Report
EXECUTIVE SUMMARY
The City of Vernon (City), through its Public Utilities Department (VPU), engaged NewGen Strategies and Solutions, LLC (NewGen) to conduct a comprehensive Water Cost of Service and Rate Study (Study) for Fiscal Year (FY) 2026 through FY 2030. The purpose of the Study is to ensure the long-term financial stability of the Water Fund, while maintaining compliance with Proposition 218 and providing equitable and transparent rates for customers. This executive summary outlines the Study’s objectives, key findings, and recommendations.
Study Objectives and Methodology
The Study was designed to establish fair and sustainable rates for the City’s domestic water, fire protection, and recycled water services. NewGen’s methodology followed industry standards, applying a four-step process: 1) determining revenue requirements, 2) conducting a cost of service analysis, 3) developing a financial plan, and 4) recommending rate structures. The analysis relied on financial data from the FY 2026 operating and capital budgets, the City’s ten-year Capital Improvement Plan (CIP), and detailed customer billing and consumption data.
Water System Overview
VPU operates a robust water system consisting of forty-nine miles of pipeline, seven wells, multiple reservoirs totaling 16.6 million gallons of storage capacity, and connections to the Metropolitan Water District (MWD) for supplemental or emergency supply. The system consistently meets high operational standards, holding the highest Insurance Service Organization rating for water systems. VPU also manages its resources through the Urban Water Management Plan to maintain sustainability and reliability amid changing water supply conditions.
Financial Forecast and Revenue Requirements
The Study forecasts total operating and maintenance expenses increasing from approximately $8.6 million in FY 2026 to $9.7 million in FY 2030. Major cost drivers include inflationary growth in salaries, maintenance, and replenishment charges from the Water Replenishment District (WRD). Existing debt service obligations remain constant at approximately $1.1 million annually, tied to a WRD well rehabilitation loan and the 2020A Revenue Bond.
Capital improvements total nearly $19 million over the study period, with funding provided through Electric Fund transfers ($10 million), Water Fund reserves, and rate revenues. The City’s capital investments will focus on system reliability, maintenance of critical assets, and infrastructure rehabilitation. Miscellaneous revenues, including water rights leases and investment income, are projected to contribute approximately $900,000 annually during the early study years.
The resulting net revenue requirement, i.e., the annual amount that must be recovered from rates, rises from $9.0 million in FY 2026 to $11.1 million by FY 2030.
EXECUTIVE SUMMARY
2 VPU Water Cost of Service Study Report
Proposition 218 Compliance and Cost of Service Findings All recommended rates comply with the Proposition 218 requirements that rates do not exceed the cost of providing service. The Study allocates costs across three types of service, namely general water service, fire protection service, and recycled water service, based on the proportional cost of service. No crosssubsidization between customer classes occurs. This structure ensures fairness and transparency, consistent with legal and professional standards for utility ratemaking.
Reserve Policy and Financial Sustainability
NewGen recommends that VPU formally adopt financial reserve policies mirroring those established for the Electric Fund. The Water Fund would maintain three reserve categories: Rate Stabilization, Operating (Working Capital), and Capital Reserves. Minimum balances total $7.2 million in FY 2026, growing to $8.1 million by FY 2030. Target balances total $17.2 million in FY 2026 and rise to $19.1 million by FY 2030.
These reserves provide stability against revenue fluctuations, emergency costs, and capital funding needs.
Recommended Rates and Customer Impacts
To meet financial targets and maintain reserve balances, NewGen recommends annual rate adjustments of seven percent for all charges through FY 2030. This adjustment applies to meter charges, volumetric consumption rates, and fire protection square footage charges. Under these rates, residential customers with typical usage (ten CCF per month) would see bills increase from $43.32 in FY 2025 to $60.78 by FY 2030. Commercial and industrial customers experience proportional increases consistent with cost of service principles.
Additionally, pursuant to Government Code Section 53756, the City may implement automatic passthrough adjustments reflecting future increases in WRD groundwater replenishment charges or MWD wholesale water purchase costs. This mechanism ensures ongoing rate alignment with actual supply costs without requiring separate Proposition 218 proceedings.
Conclusion
The recommended rate structure and reserve policies position the City of Vernon’s Water Fund for longterm financial health and operational reliability. The proposed rates are sufficient for Water Fund operations, debt service, and capital improvements while maintaining adequate reserves. The Study ensures compliance with state law and reflects sound financial management practices, providing a transparent framework for sustainable utility operations through FY 2030.
Economics | Strategy | Stakeholders | Sustainability VPU Water Cost of Service Study Report Section 1
BACKGROUND AND SCOPE OF WORK
The City of Vernon (City), through its Public Utilities Department (VPU), engaged NewGen Strategies and Solutions, LLC (NewGen) to conduct a Cost of Service and Rate Study (Study) for its water utility. This report details the background of the Study, our scope of work, the forecasted costs of VPU’s water utility over the study period of Fiscal Year (FY) 2026 through FY 2030. The City’s FY begins July 1 and ends June 30 of each year. For example, FY 2026 means the FY beginning July 1, 2025, and ending June 30, 2026.
City of Vernon Water Utility
VPU’s Water Division is a century-old municipal utility dedicated to providing reliable, safe, and affordable water service to the City of Vernon’s primarily industrial and commercial customers. The utility serves more than 800 customers and distributes approximately 1.4 billion gallons of water annually. Its water system includes seven wells, three pumping plants, and reservoirs with a total capacity of 16.6 million gallons. The system issupplemented by a direct connection to the Metropolitan Water District (MWD) for emergency and imported supplies. The system’s infrastructure spans about forty-nine miles of pipelines and operates under rigorous monitoring to ensure compliance with state and federal water quality standards.
VPU’s operations emphasize reliability, sustainability, and proactive infrastructure management. The Water Division employs advanced maintenance and monitoring practices, including real-time water quality analysis, leak repair programs, and valve and flushing maintenance, to minimize water loss and optimize service efficiency. Significant capital investments in recent years include the construction of Well 22, well and reservoir rehabilitation projects, new reservoir mixing systems, and the installation of a modern Supervisory Control and Data Acquisition (SCADA) system. Through these initiatives, VPU maintains high-quality service standards while ensuring the long-term operational and financial health of the Water Fund. VPU also prioritizes financial resiliency through disciplined fiscal management and strategic planning. VPU’s commitment to prudent financial management underscores its stability and capacity to sustain reliable operations and infrastructure investment well into the future.
Scope of Work
NewGen’s scope of work included several key tasks:
1. Establish domestic water, fire protection, and recycled water rates for the period FY 2026 through FY 2030.
2. Develop a comprehensive financial forecasting model to support ongoing rate change cycles.
3. Develop financial reserve policies to ensure the long-term sustainability of the City’s Water Fund.
4. Maintain Proposition 218 compliance, ensuring all water rates and charges are proportional to costs of service.
5. Provide transparent, accessible information to stakeholders and the public regarding the study’s scope, approach, and recommendations.
Section 1
1-2 VPU Water Cost of Service Study Report
Study Approach
NewGen’s approach to a cost of service and rate study is shown in the following graphic.
Figure 1-1: Rate Study Process
NewGen’s approach to completing a water and sewer rate study consists of four steps:
Revenue Requirements – Development of the full cost of providing service including operating costs, capital costs, and reserve requirements.
Cost of Service – Allocation of revenue requirements to customer classes or types of customers, such as residential/commercial, or inside-city and outside-city. For the purposes of VPU’s Study, this included determining costs of general water (i.e., potable water) service, fire protection service, and Recycled water service.
Financial Plan – Development of a financial plan to fund system revenue requirements considering current and future customers and demand.
Utility Pricing – Review rate designs based on revenue needs and rate design pricing objectives with specific rate projections.
This report details the information provided to NewGen to conduct the Study and NewGen’s findings, conclusions, and recommendations regarding VPU’s water rates.
Background and Scope of Work
VPU Water Cost of Service Study Report 1-3
Data Relied Upon
NewGen requested the following financial and operational information from VPU:
1. FY 2025 Water Fund Balance reports
2. FY 2026 operating and capital budgets
3. Ten-Year Capital Improvement Plan (CIP)
4. Debt amortization tables for all debt payable by the water utility
5. FY 2025 customer information including number of billed accounts, metered usage, square footage, and other relevant customer data. This information was adjusted to reflect the recent demand loss of two of the top ten water users.
6. Water production and purchase information, including well production data, replenishment fee invoices, and historical purchased water information.
Based on the data provided to NewGen by VPU, we developed the recommendations detailed in this report.
Economics | Strategy | Stakeholders | Sustainability VPU Water Cost of Service Study Report Section 2
REVENUE REQUIREMENTS
This section of our report details the forecasted costs of operating and maintaining VPU’s water system throughout the study period.
Operating and Maintenance (O&M) Costs
VPU’s Water Fund O&M costs consist of three categories:
Salaries and Benefits: The total amount of regular salaries and overtime pay for VPU employees, retirement contributions, insurance premiums, and FICA taxes.
Maintenance and Operations: The total cost of supplies, utilities, repairs and maintenance, technical professional services, administrative support services from the City, vehicle operating expenses, and other day-to-day costs necessary to run the water utility.
Purchased and Pumped Water: Payments to the Water Replenishment District of Southern California (WRD) for replenishment assessment charges and payments to the MWD for purchased treated water.
Note that while VPU budgets for a small amount of purchased treated water from MWD each year, the City has not needed to supplement its own groundwater supplies since 2022.
Table 2-1 below shows the forecasted O&M costs for VPU’s system over the study period.
Table 2-1
Operating and Maintenance Costs Forecast (Thousands)
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
Salaries and Benefits $2,735 $2,826 $2,921 $3,019 $3,120 Maintenance and Operations $3,742 $3,856 $3,965 $4,074 $4,191 Purchased / Pumped Water $2,094 $2,156 $2,231 $2,309 $2,388 Total O&M Expenses $8,570 $8,838 $9,117 $9,402 $9,698
Existing Debt Service
Over the Study forecast period VPU’s Water Fund will be obligated to pay two outstanding debts:
Well Construction and Rehabilitation Loan (Well 22): The WRD offers a Well Construction and Rehabilitation Loan Program to help groundwater producers maintain their extraction capacity by funding well construction or rehabilitation. Eligible projects include installing a new well or repairing an existing one to enhance water production. VPU secured a loan of $1.5 million in mid-2020 with quarterly payments of approximately $35,000 that will mature in March 2031. Revenue Bond Series 2020A: The City issued Revenue Bond Series 2020A in the principal amount of $14.84 million in June 2020. The bonds mature in August 2050 with semi-annual interest payment and periodic balloon principal payments. For the purposes of this Study, NewGen amortized the balloon principal payment totaling $1.985 million due in FY 2030 equally each year over the five-year study Section 2
2-2 VPU Water Cost of Service Study Report
period, resulting in annual payments of approximately $397,000. Annual interest payments are approximately $542,000 over the study period.
Table 2-2 shows the total annual debt service payments included in the Study forecast.
Table 2-2
Existing Debt Service Forecast (Thousands)
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
WRD Loan $140 $140 $140 $140 $140
Series 2020A $939 $939 $939 $939 $939
Total Existing Debt Service $1,079 $1,079 $1,079 $1,079 $1,079 Planned Capital Improvements
The City provided NewGen with a detailed ten-year CIP. The detailed CIP is provided in Appendix A.
A key component of the Study is the funding of the City’s CIP. There are three sources of funds for the CIP:
Transfers from VPU’s Electric Fund: Over the five-year study period, the City will transfer $10.5 million from the Electric Fund to support the water system CIP. The Water Fund will repay this amount over thirty years at zero percent interest beginning in FY 2030. Annual payments will be $350,000. Water Fund Balance: In the first four years of the Study forecast period, VPU will draw on Water Fund reserves to fund a portion of the CIP.
Water User Rates: Each year, any CIP spending not funded by Electric Fund transfers or draws on Water Fund reserves will be funded by water rates.
Another key Study assumption is that VPU will achieve a ninety percent completion rate in each year of the CIP. Table 2-3 shows the total CIP spending and funding sources in each year of the Study forecast.
Table 2-3
Capital Improvement Funding Plan Summary (Thousands)
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
Total Capital Investment $3,951 $7,630 $4,594 $1,130 $942 Capital Completion Factor 90% 90% 90% 90% 90%
Study Capital Investment $3,556 $6,867 $4,135 $1,017 $848 Sources of Funds
Electric Fund Transfers $2,500 $5,500 $2,500 $0 $0
Water Fund Balance $829 $767 $798 $113 $0
Water User Rates $227 $600 $837 $904 $848
Total Sources of Funds $3,556 $6,867 $4,135 $1,017 $848 Any additional funds needed to support the City’s capital plan over the forecast period would come from the Capital Reserve discussed later in this report. Although the Study includes transfers from the City’s Electric Fund to fund water capital projects, the City has the option, at its discretion, to issue additional debt to fund its CIP in lieu of transfers from the Electric Fund.
Revenue Requirements
VPU Water Cost of Service Study Report 2-3
Miscellaneous Non-Rate Revenues
The Water Fund’s revenue structure is comprised primarily of revenue from rates and fees. However, each year the Fund receives income from other sources.
Investment Income: The Water Fund generates income on cash held in reserves. NewGen assumes the Fund will generate 2.8 percent annual interest on any reserves held over the forecast period. Late Fees and Installation Charges: VPU charges fees for late payment and meter installations. This income is minor, approximately $5,000 per year combined. Water Rights Lease: VPU holds groundwater extraction rights within the Central Basin, a major adjudicated groundwater basin in southern Los Angeles County. These rights entitle the City of Vernon to pump a defined annual quantity of groundwater for municipal and industrial use. The rights are managed under the Central Basin Judgment, which governs allocations among producers and is overseen by the WRD and the State Water Resources Control Board. In recent years, VPU has only used a portion of its rights to meet customer demand. Beginning in FY 2025, the City signed lease agreements to lease its excess water rights. NewGen includes these revenues for the duration of the lease, through FY 2028.
Other Income: Other miscellaneous income items.
Table 2-4 shows the non-rate revenues included in the Study forecast.
Table 2-4
Miscellaneous Non-Rate Revenues (Thousands)
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
Investment Income $550 $539 $517 $495 $492
Late Fees $2 $2 $2 $2 $2
Installation Charge $3 $3 $3 $3 $3
Water Rights Lease $370 $435 $305 $0 $0
Other Income $3 $3 $3 $3 $3
Total Miscellaneous Revenues $928 $981 $830 $502 $499
Net Revenue Requirement Forecast
The sum of the total revenue requirement, less non-rate miscellaneous revenues, is the net revenue requirement that water rates and charges must generate each year to sustain the Water Fund. Table 2-5 below shows the forecasted total and net revenue requirement for the Study.
Section 2
2-4 VPU Water Cost of Service Study Report
Table 2-5
Net Revenue Requirement Forecast (Thousands)
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
Operating Expenses $8,570 $8,838 $9,117 $9,402 $9,698
Existing Debt Service $1,079 $1,079 $1,079 $1,079 $1,079 Capital Improvements $3,556 $6,867 $4,135 $1,017 $848
Contributions to Reserves $0 $0 $0 $0 $110
Total Revenue Requirement $13,205 $16,784 $14,331 $11,498 $11,735 Less
Transfer from Electric Fund ($2,500) ($5,500) ($2,500) $0 $0 Other Misc. Revenues ($928) ($981) ($830) ($502) ($499) Use of Water Fund Balance ($829) ($767) ($798) ($113) $0 Net Revenue Requirement $8,948 $9,536 $10,203 $10,883 $11,236 The increase in the net revenue requirement is driven by increases in operating and maintenance costs, as well as the City’s forecasted CIP.
Economics | Strategy | Stakeholders | Sustainability VPU Water Cost of Service Study Report Section 3
COST OF SERVICE
This section of our report summarizes our evaluation of the City’s water rates relative to the requirements of the California Constitution Article XIII D, Section 6, as modified by Proposition 218.
California Constitution – Article XIII D, Section 6 (Proposition 218) Proposition 218, a portion of which is set out in the California Constitution as Article XIII D, was enacted in 1996 to ensure that public agency utility service rates, fees, and charges are reasonable and proportional to the cost of providing the applicable services. The principal requirements for application of such rates, fees, and charges, as they relate to public water service, are as follows:
1. A property-related rate/fee/charge imposed by a public agency on a parcel shall not exceed the costs required to provide the property-related service.
2. Revenues derived by the rate/fee/charge shall not be used for any purpose other than that for which it was imposed.
3. The amount of the rate/fee/charge imposed upon any parcel shall not exceed the proportional cost of service attributable to the parcel.
4. Rates must reflect services immediately available to a fee payor.
5. Rates may not fund general governmental services, like police and fire services.
The American Water Works Association Manual M1 – Principles of Water Rates, Fees, and Charges, 7th Edition (Manual M1) states that water rates and charges should be recovered from types of customers in proportion to the cost of serving those customers. Proposition 218 requires that water rates/fees/charges be reasonable, meaning that the rate-setting methodology must be sound and that there must be a nexus between the costs and the rates charged.
While this report should not be considered legal guidance, as it does not offer any assurances of compliance with any other state, federal, or other laws, our methodology is guided by the best available legal guidance and strives to match that guidance. Specifically, In the San Juan Capistrano case, the court stated that any rates, including tiered rates, must “correspond to the actual cost of providing service at a given level of usage.” Furthermore, the court stated:
“And, we emphasize, there is nothing at all in [California Constitution Article XIII D, section 6,] subdivision (b)(3) or elsewhere in Proposition 218 that prevents water agencies from passing on the incrementally higher costs of expensive water to incrementally higher users. That would seem like a good idea. But subdivision (b)(3) does require they figure out the true cost of water, not simply draw lines based on water budgets... Our courts have made it clear they interpret the Constitution to allow tiered pricing; but the voters have made it clear they want it done in a particular way.” The ratemaking agency “bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear Section 3
3-2 VPU Water Cost of Service Study Report
a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.” (California Constitution, article XIII C, section 1(e) (final paragraph).
VPU’s water rates are structured in a way that clearly demonstrates Proposition 218 compliance. First, VPU does not charge different rates to different customer classes, which eliminates the need for a traditional water cost of service analysis of functionalization, allocation, and distribution as discussed in AWWA Manual M1. Second, VPU has clearly defined rates for distinct services:
General Water Service: General Water Service refers to the delivery of potable water to consumers for everyday domestic, commercial, and industrial use. VPU’s monthly meter charges and volumetric rate per hundred cubic feet (CCF) of metered water are designed to cover the cost of general (i.e., potable) water service.
Fire Protection Service: Fire Protection Service refers to service tied to the presence of water capacity reserved for fire suppression, rather than routine consumption. VPU charges a monthly charge per square foot of building area to cover the costs of this service. Recycled Water Service: Recycled Water Service refers to the provision of non-potable water for the purpose of industrial processes. Specifically in the case of VPU, the City’s power plant is the sole recycled water service connection.
As stated previously, NewGen’s calculated rates are based on the net revenue requirement of the system, meaning that revenue from rates is by definition lower than the total revenue requirement. In this manner, NewGen’s calculated rates adhere to Proposition 218 requirements to ensure that they do not exceed the proportionate cost of providing the corresponding services.
Cost of Service Analysis
To demonstrate compliance with Proposition 218, Table 3-1 shows the difference between proposed rate revenues and the demonstrated total cost of service for each of the City’s rate classifications.
Cost of Service
VPU Water Cost of Service Study Report 3-3
Table 3-1
Assignment of Total Revenue Requirement to Services (Thousands) FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
Total Cost of Service (1) $13,600 $17,547 $14,790 $11,611 $12,179 General Water Service
Assignment of Total COS (%) 75.0% 75.0% 75.0% 75.0% 75.0% Assignment of Total COS ($) $10,200 $13,160 $11,093 $8,708 $9,135 Proposed Rate Revenue $6,659 $7,086 $7,582 $8,113 $8,681 Rate Revenue – Total COS ($3,540) ($6,074) ($3,510) ($596) ($454) Fire Protection
Assignment of Total COS (%) 20.0% 20.0% 20.0% 20.0% 20.0% Assignment of Total COS ($) $2,720 $3,509 $2,958 $2,322 $2,436 Proposed Rate Revenue $1,895 $2,028 $2,170 $2,288 $2,389 Rate Revenue – Total COS ($825) ($1,481) ($788) ($35) ($47) Recycled Water
Assignment of Total COS (%) 5.0% 5.0% 5.0% 5.0% 5.0%
Assignment of Total COS ($) $680 $877 $740 $581 $609
Proposed Rate Revenue $394 $421 $451 $483 $516
Rate Revenue – Total COS ($286) ($456) ($289) ($98) ($93) (1) Note: Total Cost of Service includes 100% completion factor for the CIP The cost assignments shown above are based on NewGen’s evaluation of reasonable cost assignments for Fire Protection and Recycled Water based on the data provided by the City. All remaining costs are assigned to General Water Service. As shown above, in no year do the revenues generated by any of the City’s service charges exceed the total cost of service for that service.
Economics | Strategy | Stakeholders | Sustainability VPU Water Cost of Service Study Report Section 4
FINANCIAL FORECAST AND RECOMMENDED RATES
Based on the net revenue requirement and the customer information developed during the Study, NewGen recommends the five-year rate schedule detailed in this section.
Reserve Policy Recommendations
NewGen developed a reserve policy that mirrors VPU’s Electric Fund Financial Reserves policy to the extent that the Water Fund faces similar financial risks.
The VPU Electric Fund Financial Reserves Policy, adopted in August 2024, establishes a comprehensive framework for managing the Electric Fund’s cash reserves to ensure financial stability, liquidity, and longterm rate competitiveness. The policy defines three primary reserve funds: the Rate Stabilization Fund, the Operating Reserves Fund (Working Capital), and the Capital Reserve Fund. Collectively, these reserves are intended to mitigate financial risks arising from fluctuating energy markets, revenue volatility, operational disruptions, and unforeseen capital needs.
While the Water Fund is not exposed to the same commodity risk (i.e., power supply risks) or credit risks, there are similar risks for the Water Fund related to revenue risks, operating risks, and capital risks.
Therefore, NewGen developed policies for the same three reserves for the VPU Water Fund:
1. Rate Stabilization Reserve is designed to protect VPU’s liquidity and shield customers from sudden rate increases by covering temporary shortfalls in revenue. The minimum recommendation for the rate stabilization reserve is ninety days of annual rate revenue. The recommended target is one hundred eighty days of annual rate revenue.
2. Operating Reserves (Working Capital) ensures adequate liquidity to maintain daily operations and absorb short-term shocks such as emergency repairs, compliance costs, or temporary service disruptions. The minimum recommendation for working capital is ninety days of annual O&M expenses. The recommended target is one hundred eighty days of annual O&M expenses.
3. Capital Reserves provide resources for planned and unexpected capital expenditures, reducing the need to issue debt or further transfers from the Electric Fund. The minimum recommendation for the capital reserve is one year of planned CIP spending. The recommended target is three years of average CIP spending.
Recommended Reserves Forecast
Table 4-1 shows the minimum and recommended target balances for each of VPU’s Water Fund reserves.
Section 4
4-2 VPU Water Cost of Service Study Report
Table 4-1
Recommended Reserve Minimums and Targets (Thousands)
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
Minimum Reserve Balance
Operating (Working Capital) $2,113 $2,179 $2,248 $2,318 $2,391 Rate Stabilization $2,207 $2,351 $2,516 $2,683 $2,857
Capital $2,863 $2,863 $2,863 $2,863 $2,863
Total Minimum Reserves $7,182 $7,393 $7,627 $7,864 $8,111 Target Reserve Balance
Operating (Working Capital) $4,226 $4,359 $4,496 $4,637 $4,783 Rate Stabilization $4,413 $4,703 $5,032 $5,367 $5,714
Capital $8,588 $8,588 $8,588 $8,588 $8,588
Total Target Reserves $17,227 $17,649 $18,116 $18,592 $19,084 NewGen’s recommended rates are designed to meet the target reserves level shown above. If the forecasted reserves fall below the target level, NewGen developed rates to meet the target as soon as reasonably possible.
Currently Effective Rates
The City’s most recently adopted water rates have been in effect as of January 1, 2024. Table 4-2 shows VPU’s currently effective rates that serve as the basis for NewGen’s rate forecast.
Financial Forecast and Recommended Rates
VPU Water Cost of Service Study Report 4-3
Table 4-2
Fiscal Year 2025 Effective Rates
FY 2025 Unit
Meter Charges
5/8" $18.52 Monthly
3/4" $27.78 Monthly
1" $46.30 Monthly
1-1/2" $92.63 Monthly
2" $148.21 Monthly
3" $277.89 Monthly
4" $463.16 Monthly
6" $926.29 Monthly
8" $1,482.09 Monthly
Retail Consumption Rate $2.48 per CCF
Monthly Square Footage Charge $0.00410 per sq. ft.
Recycled Water Rate $1.81 per CCF
Customers and Demand
To develop the basis for the Study’s rate revenue, NewGen evaluated several years of detailed billing data.
The Study is based on an annualized number of customer accounts, square footage, and billed water consumption that reflects the sum of VPU’s monthly billing totals for FY 2026. Table 4-3 below shows the number of customers and billable units for each of VPU’s water charges.
Section 4
4-4 VPU Water Cost of Service Study Report
Table 4-3
Customers and Demand
Annualized FY 2026
General Service Connections
5/8" 20
3/4" 23
1" 211
1-1/2" 143
2" 495
3" 33
4" 56
6" 23
8" 0
Total General Service Connections 1,003
General Service Consumption (CCF) 1,840,281
Building Square Footage 37,073,778
Recycled Water
Connections 1
Consumption (CCF) 201,633
The City has a small amount of unmetered customers (less than five) that are billed based on ½ the fixed monthly fee for a ⅝” meter and a fixed assumed usage of 2.45 CCF per bedroom. Temporary hydrant meters are charged $200 to install (not including $800 refundable deposit) and $50 per re-install. The City is proposing to increase the deposit to $2,500 given the cost of the temporary meters. Temporary hydrant meters are charged the retail consumption rate for all metered usage.
A key assumption for the Study is that the City will experience no growth or decline in either customers or billable water usage over the forecast period. As stated previously, the annual billing determinants have been adjusted for the recent loss of two large customers. These recent losses are in addition to the decrease in users over the past several years. Going back to approximately 2020, VPU’s water rate revenue is approximately $2.5 million per year lower in 2025, due to the loss of these customers.
Financial Forecast and Recommended Rates
VPU Water Cost of Service Study Report 4-5
Recommended Rates
Table 4-4 shows NewGen’s recommended rates for each year of the Study forecast period given the forecasted costs of the system and customer base.
Table 4-4
Recommended Rates – Effective January 1 Each Year
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
Annual Rate Increase (all rates) 7.0% 7.0% 7.0% 7.0% 7.0% Meter Charges
5/8" $19.82 $21.20 $22.69 $24.28 $25.98
3/4" $29.72 $31.81 $34.03 $36.41 $38.96
1" $49.54 $53.01 $56.72 $60.69 $64.94
1-1/2" $99.11 $106.05 $113.48 $121.42 $129.92
2" $158.58 $169.69 $181.56 $194.27 $207.87
3" $297.34 $318.16 $340.43 $364.26 $389.76
4" $495.58 $530.27 $567.39 $607.11 $649.61
6" $991.13 $1,060.51 $1,134.75 $1,214.18 $1,299.17
8" $1,585.84 $1,696.84 $1,815.62 $1,942.72 $2,078.71
Retail Consumption Rate $2.65 $2.84 $3.04 $3.25 $3.48
Monthly Square Footage Charge $0.00439 $0.00469 $0.00502 $0.00522 $0.00551 Recycled Water Rate $1.94 $2.08 $2.22 $2.38 $2.54
Water Cost Adjustment
In addition, pursuant to California Government Code 53756, the City proposes to authorize automatic adjustments that pass-through to the water customers’ increases in charges for groundwater charges from the Water Replenishment District of Southern California (WRD) and/or water purchased from the Metropolitan Water District of Southern California (MWD).
Financial Forecast Under Recommended Rates
Figure 4-1 below shows the forecasted Water Fund balance by recommended reserve for the five-year study period under the recommended rates shown above.
Section 4
4-6 VPU Water Cost of Service Study Report
Figure 4-1. Five-Year Water Fund Balance Forecast Under Recommended Rates Customer Bill Impacts
Table 4-5 shows three sample customers and the impact of the recommended rates on the monthly bill for each of those customers:
Residential customer with ⅝” meter and 10 CCF monthly consumption. Commercial customer with a 2” meter and 200 CCF monthly consumption. Industrial customer with a 4” meter, 5,500 CCF monthly consumption, and 50,000 square feet of building area.
Table 4-5
Customer Bill Impacts – Recommended Rates
FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030
Residential $43.32 $46.35 $49.63 $53.09 $56.81 $60.78
$ Difference $3.03 $3.28 $3.46 $3.71 $3.97
% Difference 7.0% 7.0% 7.0% 7.0% 7.0%
Commercial $644.21 $689.30 $738.29 $789.70 $844.93 $904.03 $ Difference $45.09 $48.98 $51.42 $55.23 $59.10
% Difference 7.0% 7.0% 7.0% 7.0% 7.0%
Industrial $14,308.16 $15,309.73 $16,401.49 $17,542.32 $18,761.14 $20,069.55 $ Difference $1,001.57 $1,091.76 $1,140.83 $1,218.81 $1,308.42 % Difference 7.0% 7.0% 7.0% 6.9% 7.0%
Financial Forecast and Recommended Rates
VPU Water Cost of Service Study Report 4-7
Regional Bill Comparisons
The following figures demonstrate the impact of the recommended rate increases on the sample VPU customers and how their bills compare to other utilities in the region.
Figure 4-2. Regional Residential Bill Comparison
Section 4
4-8 VPU Water Cost of Service Study Report
Figure 4-3. Regional Commercial Bill Comparison
Financial Forecast and Recommended Rates
VPU Water Cost of Service Study Report 4-9
Figure 4-4. Regional Industrial Bill Comparison
As demonstrated by the figures above, the cost of VPU’s water service remains one of the lowest in the region under the FY 2026 recommended rate. Note that the above charts include rate information for the comparison utilities at the time of this report and do not include any planned or anticipated rate increases.
It is reasonable to assume that surrounding utilities will be adopting rate increases in the years to come.
Economics | Strategy | Stakeholders | Sustainability VPU Water Cost of Service Study Report Appendix A
CAPITAL IMPROVEMENT PLAN DETAIL
Table A-1
Capital Improvement Plan Detail
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 Total
Well 19 Rehabilitation-New Pump and Motor $780,000 $0 $0 $0 $0 $780,000 Manganese Assessment & Well 20 Treatment Design $667,500 $50,000 $50,000 $0 $0 $767,500 Well 20 Mn & PFOS Treatment Construction $0 $3,500,000 $2,600,000 $0 $0 $6,100,000 Elevated Tank Rehabilitation $0 $858,000 $891,000 $0 $0 $1,749,000 Well 19 and PP1 Electrical Upgrades & SCADA (NW) $859,000 $0 $0 $0 $0 $859,000 System-Wide Seismic Vulnerability Assessment $220,700 $0 $0 $0 $0 $220,700 System-Wide Soil Corrosivity Assessment $150,000 $0 $0 $0 $0 $150,000 Small Diameter In-Pipe Testing Assessment $0 $364,000 $0 $0 $0 $364,000 Implementation of Small Dia. Pipe Testing $0 $977,600 $0 $0 $0 $977,600 Well 16 Rehabilitation $418,400 $0 $0 $0 $0 $418,400
Well 11 Major Maint/Rehab $0 $600,000 $0 $0 $0 $600,000 Well 15 Major Maint/Rehab $0 $600,000 $0 $0 $0 $600,000 Well 20 Major Maint/Rehab $0 $0 $728,000 $0 $0 $728,000 Well 22 Major Maint/Rehab $0 $0 $0 $648,000 $0 $648,000 Booster Pump & Motor (B3-3, B1-4, B1-3) $100,000 $0 $0 $0 $0 $100,000 Smart Meter Program $50,000 $50,000 $50,000 $50,000 $50,000 $250,000 Fencing (W11, W15, W19, PP2, PH2) $35,000 $54,080 $275,400 $263,200 $307,420 $935,100 Packers/Exchange & Downey Pipeline Extension $0 $161,200 $0 $0 $0 $161,200 Soto Bridge Main Rehabilitation $0 $0 $0 $109,200 $0 $109,200 Well 21 Generator $350,000 $0 $0 $0 $0 $350,000
Well 21 Gate Operator $30,000 $0 $0 $0 $0 $30,000
Fire Hydrants $25,000 $0 $0 $0 $0 $25,000
Replace W104 - Backhoe in Water $200,000 $0 $0 $0 $0 $200,000 Replace W112 - MD Work truck in Water - MY ADJ $65,000 $0 $0 $0 $0 $65,000 Replace W105 - Backhoe in Water $0 $115,000 $0 $0 $0 $115,000 Vac Truck for Water $0 $300,000 $0 $0 $0 $300,000
Replace W1035 - LD Truck for Water $0 $0 $0 $60,000 $0 $60,000 Replace W1040 - LD SUV for Meter Reader $0 $0 $0 $0 $85,000 $85,000 Other Water CIP Projects $0 $0 $0 $0 $500,000 $500,000
Total $3,950,600 $7,629,880 $4,594,400 $1,130,400 $942,420 $18,247,700 Total w/ 90% Completion Factor Adjustment $3,555,540 $6,866,892 $4,134,960 $1,017,360 $848,178 $16,422,930 900 Bestgate Road, Suite 402, Annapolis, MD 21401
Phone: (443) 951-4207
Email: [email protected]
www.newgenstrategies.net